Among continued supply chain disruption, inflation, and other economic challenges, recent trends point to an increase in demand for B2B spare parts companies in 2023. In this post, we examine a few pricing and revenue optimization and management strategies spare parts companies can leverage to intelligently take advantage of this demand increase and ensure profitability.
An Increase in Demand Amid Economic Uncertainty
As we reach three years since the start of the global COVID pandemic, the business-disrupting economic challenges created in its wake are still going strong and even compounding. Continuing supply chain issues and market volatility have collided with recent inflation-driven high-interest rates and recessionary fears, which is adding up to an extremely complicated pricing and sales environment for the spare parts industry in 2023.
When narrowing in on the auto parts industry, this economic turmoil has created a weakened demand for new cars. However, there is a glimmer of opportunity for auto parts companies in 2023. As consumers hold on to their current vehicles for longer, the demand for parts appears to be on the rise. “The trend of driving older cars longer doesn’t seem to be slowing down. According to IHS Markit research, the average vehicle age was 11.9 years in 2020, 12.1 years in 2021 and is expected to be 12.6 by 2025,” according to SupplyChainBrain.com
This is a trend being seen in other spare parts sectors, including aerospace. “Strong travel demand and supply chain disruptions have forced airlines to fly older planes for a longer period, boosting demand for high-margin after-market services at companies such as Raytheon, which counts Boeing Co and Airbus SE among its customers,” reports Reuters.com.
While this increase in demand is beneficial, it doesn’t amount to much if B2B spare parts companies cannot avoid margin leakage and ensure profitability. Read on for a closer look into some impactful strategies spare parts companies can utilize to not only get ahead of economic and market volatility but level up their pricing and revenue optimization and management game and stay ahead of the competition.
Update Prices with Speed and Precision
Inflationary or deflationary cost fluctuations increase the need for frequent price updates. But for many B2B companies, when input prices rise, margin leakage grows due to an overreliance on legacy tools and processes used to pass through cost changes. Such legacy tools are not only ineffective in today’s digital age, but they lack the ability to deal with current inflationary pressures with the necessary speed and precision.
Inflation has provided air cover to raise system prices, but as interest rate hikes soften demand, distributors using a cost-plus pricing model risk cratering margin. The reason? Distributors that have taken the cost-plus, or “peanut butter spread” approach wherein prices are raised uniformly across the board will find their prices (and margins) plummeting if costs drop and they lack a means to surgically and softly lower pricing.
Rather than dropping prices quickly in one decrease, parts companies need to consider a more nuanced approach in which smaller price decreases are implemented in an agile and intentional manner. This scenario allows for more margin retention – and if a recession is on the horizon – success means holding on to margin gains for as long as possible.Continue reading "Spare Parts Companies: Strategies for Ensuring Profitability"